Wednesday, December 08, 2004

DTT dark horse

Today I attended day two of the “European Media Leaders Summit” co-sponsored by Informa Media and PricewaterhouseCoopers, and sat on a panel with the title of “Can DSL make the Triple Play work?” or something like that. For this post I will concentrate on the two most interesting and relevant panels I saw – mine and the discussion of digital terrestrial television (DTT).

On the panel with me were familiar faces like Alessandro Petazzi of Fastweb and Roger Lynch from Video Networks, and also new faces Michael Zumsteg of Swisscom’s ISP Bluewin and Alex Ogilvie, European business development point man for Warner Bros. International Television. I think our panel was pretty interesting, given the composition – one content player, one incumbent, two challengers and one of whatever I am. Much of the ground covered in our panel was by now familiar to many readers, but there were some additional tidbits worthy of comment.

There was much discussion of the need to avoid consumer confusion, and to make the interface as seamless as possible, especially for incumbents, because while they have huge customer bases, the mental divide for many consumers between telephony/internet and television is a huge one. This is a point I think I may have touched on in the past as well, and it is probably no less difficult for the newcomers. Alessandro Petazzi pointed out that 40% of Fastweb customers take TV services but do not have a PC at home, so obviously the proposition for these customers is inherently different from what we might consider to be a classic triple play. I earlier overheard him saying to someone in the coffee break that in some cases customers are not initially aware that the internet and television services are actually provided by the same party. Such is the mental gap which must be bridged in selling the two together, and it will be interesting to see how a more mature player such as Fastweb deals in future with a target audience which may be inherently more skeptical and less tech-savvy than those who have taken the service in its first phase of expansion.

We were asked about potential inhibitors to market development, and Warner Bros. along with the two newcomers immediately jumped on the piracy issue. I chimed in with my refrain on generational change and P2P usage, and felt like I was largely greeted with uncomprehending stares by the audience. At this point I asked for a show of hands of those in the audience who had used BitTorrent. Not a hand went up. I then asked how many in attendance had heard of BitTorrent. I counted four out of 200 attendees, which was pretty surprising to me. Given that most of the attendees were in some way involved in the business of media creation, licensing or distribution, and given that the industry has consistently decried the impacts it has suffered from P2P networks, I assumed that they would be more aware of who the enemy/potential ally was. Perhaps this reflects the demographic present, and reminded me of a remark made last year by Jeff Pulver at VON in Boston (if I remember it clearly) – “Never trust a product strategy person over the age of 30.” I’m well over 30, but I have made a point of learning about these developments (there is certainly no shortage of information freely available on the web), and I expected more from people whose livelihoods depend on knowing where the next disruptive shift is coming from. I decided at this point to cut my losses and not even broach the subject of new forms of social or decentralized media created and distributed independently of the major studios, labels or publishing groups. Maybe next year.

I did drop in the French research correlating increased download demand over eDonkey with linear broadcasts, and Alessandro Petazzi remarked that Fastweb sees the same patterns in its legal VOD service. This is indeed good news for players involved in access and distribution. Michael Zumsteg observed that the walled garden approach was not a tenable option, but neither was unbridled illicit access to copyrighted content. He stated that the industry needed to strive for something which is “both open and controlled.” Alessandro acknowledged the need for players in the space to accommodate this demand through DRM which would allow downloaded content to cross device boundaries within the home (TiVO-2-Go anyone?). I agree, and I do not advocate piracy, but I acknowledge it as a reality of the market, and one which probably cannot be dealt with adequately purely through coercive means. I think the real issue lies in how the industry copes with, or even harnesses, this phenomenon. Roger Lynch from Video Networks made a compelling case that investing in a content catalogue of sufficient depth to obviate the need for engaging in file sharing is one answer, and stated that the average HomeChoice subscriber spends 10 hours per week using on-demand services.

I earlier stated that one of my other concerns for market development was that players involved in the access and distribution side were vulnerable to a direct sales strategy from content owners (a la Major League Baseball’s subscription service in the US). Indeed, one question from the floor addressed this issue, as an attendee involved in broadband access provision questioned how he could insulate his business from this type of disintermediation. Roger Lynch observed that the only real alternative was to invest in developing a range of content which could serve as a buffer against this. The other angles mentioned by both him and Alessandro were multiplayer gaming and videoconferencing, though I think this is something users could also self-provision if we subscribe to the “dumb pipe” scenario. Nevertheless, the sentiment is a valid one – access providers have to continually strive to create features of the service beyond TV which differentiate it from competing offerings which may be one-dimensional, but superior in depth or breadth.

This brings us nicely to the last issue of note which I found interesting: the question of whether a DSL triple play platform can maintain its innovativeness in the face of satellite, particularly in a market like the UK. The gaming and interactive services issue was raised again, as well as DSL’s ability to offer true VOD today. In the PVR field, the advent of MPEG4 and ADSL 2+ would make it possible to offer multiple streams (one of the key differentiators of Sky+ at present). No one happened to mention throughout this process that the Sky+ boxes being pushed so hard at present will not be forward compatible with HDTV… Michael Zumberg also made some interesting comments about the potential which DSL opens up for personalized marketing and advertising, which satellite cannot replicate. Lastly, (and partly related to an earlier question about relative strengths and weaknesses of PTTs and newcomers, respectively) Alex Ogilvie from Warner remarked that one of the main criteria for his company in agreeing content deals in the DSL triple play space was long-term sustainability of the partner’s business model. Perhaps I’m reading too much into this statement, but my gut feeling was that this inevitably puts the ball in the court of those with large customer bases and strong balance sheets – and that in my view spells P T T, despite the innovative efforts of the newcomers.

The DTT panel, which followed mine, served as an interesting contrast to some of the more whiz-bang aspects of TV over DSL, and indeed moderator Chris Wynn from Informa remarked in his opening comments that it almost felt like his panel was discussing the poor relation of the digital TV world. However, I found this panel very interesting, as it seems that the entire phenomenon of DTT in the UK and Italy turns a lot of smug industry assumptions about demand and consumer behavior on their heads.

This was particularly well-highlighted by Carolyn Fairbairn of the BBC. She outlined the development of Freeview from its origins in the ashes of the ITVDigital bankruptcy, stressing that the BBC’s research showed strong demand for digital TV with no subscription – plain and simple. Certainly, with Freeview adding 200k viewers per month, it is difficult to argue against this premise. Alberto Sigismondi of Mediaset highlighted the success story of DTT in Italy (1m set-top boxes installed so far, and universal adoption of MHP), including the pay-per-view services possible over the platform. In the case of the Mediaset service, pay-per-view soccer on a prepaid basis is to become a reality, via prepaid conditional access cards, a model which Mr. Sigismondi described as “pay TV lite.” Carolyn Fairbairn remarked that the BBC also saw potential for paid services associated with the DTT platform, so long as they are marketed transparently (she cited Top Up TV as a case in point). She alluded to BBC research showing that one of the primary factors of resistance to pay TV services among non-adopters is that a subscription service may bombard viewers with a bunch of channels which they don’t actually want.

These points seem to validate statements made by Hans Hege of the Media Authority of Berlin-Brandenburg (which took the radical approach of switching off analogue as an experiment), who advanced the view that the realistic model for pay TV in markets where consumer demand would not support offerings as broad as Sky’s in the UK (he claimed that only 13% of pay TV households in Germany take premium services), would be something along the lines of the prepaid model in the mobile world, where users anonymously buy credits with no commitment or lock-in, and buy additional content such as ringtones or wallpapers on an a la carte basis. Mr. Hege also stressed the potential that the DTT platform has to provide mobile services via DVB-H, which is clearly an area worthy of further exploration.

DTT clearly has taken many by surprise, and has more to offer, but it is not without its teething problems. Sylvain Audigier of TF1 in France highlighted that one DTT channel alone generates EUR5m in annual distribution costs, leaving some programmers with as little as EUR3 – 4m in annual programming budgets. Ironically, channels proliferate, but programming becomes poorer in the process. Moderator Chris Wynn touched on the same point in questions about Channel 4’s appeal to the BBC to cover its transmission costs, and the broader question of what happens if the Freeview service doesn’t achieve ubiquitous coverage with all channels.

The thorny issue of effective state subsidies to DTT inevitably came up, most pointedly towards the BBC, which actively cross-promotes its digital channels on its analogue television and various radio services. Carolyn Fairbairn reiterated that the BBC is platform-neutral. For those not resident in the UK, I have to convey the fact that on BBC Radio 4, for example, there are frequent spots highlighting the existence of BBC’s digital channels, and that these are available on cable, satellite and Freeview. However, the time and detail afforded Freeview, including an explicit reference to entry-level pricing of GBP50 with no subscription, would seem to give preferential treatment to this platform. I later heard one attendee remark that manufacturers of integrated digital TVs, such as Sony and Philips, were “hopping mad” because the BBC has consistently stressed the availability of set-top boxes while never including any mention of the availability of TVs with integrated DTT tuners.

I think this latter situation may reflect a recognition within the BBC that the set-top box holds all manner of wonders over the next year, which will strengthen the proposition for DTT, and also for the BBC’s other content beyond “TV” as such. Specifically, I expect to see in 2005 DTT set-top boxes with embedded DSL modems, hard-drives, Wi-Fi, and possibly VoIP ports (there are already three DTT PVRs in the UK market). In the UK particularly, but also in other markets in Europe, DTT may provide an expedient mechanism for DSL players to deliver TV without all the complications of replicating linear broadcast, leaving them free to focus on on-demand services (obviously subscribers may also be making some other choices regarding sources for on-demand content). From a fundamental demand point of view, I think the industry does really have to ask itself, for the remaining non-converts to multichannel TV, how much TV is enough at what price, and what else needs to be part of the user experience to make it sell? I admire the efforts and achievements of the advanced triple play operators in the DSL sphere, but I am also open to the idea that the way things ultimately pan out will look quite different, and may well involve DTT as the primary TV input.